IPPs will agree to forensic audit, hopes PM's aide

ISLAMABAD: Special Assistant to Prime Minister on Power Muhammad Ali has disclosed that 15 out of 18 IPPs set up under 2002 and 1994 power policies have signed revised agreements on take and pay mode under the hybrid system, which will help save the government Rs800 billion in the remaining period of their existing contracts.

However, they will be paid annually a reasonable amount to bear the expenses to be incurred on operation and maintenance. The government will pay only against the actual electricity dispatch under ‘take and pay’ mode and the IPPs would not be paid capacity payments at all. However, it would also pay the annual expenditures enough to keep the power plants afloat to ensure their existence in the system.

The SAPM expressed the views in the two-hour-long Geo News’s talk show “Aakhri Mauqa: Pakistan Kay Liye Kar Dalo” anchored by Shahzeb Zhanzada. He said the masses were paying an average Rs18.39 as capacity per unit to all electricity generating outlets, but if it comes to the private sector IPPs, the consumer is paying Rs29.70 per unit in the head of capacity payments. So, when it is said that the impact would be nominal when the private sector IPPs are persuaded to agree on take and pay mode, for instance, a 50 paisa per unit reduction means that consumers will not pay Rs50 billion to the IPPs, a huge amount. He said the take and pay agreement with 18 IPPs would help lower Re0.70-Rs1 per unit with the impact of Rs70-100 billion.

He said the power firms also did not allow Nepra to conduct a “heat rate audit” of them. “If the matter was kosher, so why did they not let that happen?” he asked, refuting the notion that everything about the power firms was audited. He added that if IPPs would not allow the regulators to conduct the audit, they become “dysfunctional” and hoped that they would agree to the audit.

Former SAPM on China-Pakistan Economic Corridor (CPEC) Khalid Mansoor, former caretaker minister Gohar Ejaz, former chairman of All Pakistan Textile Mills Association (APTMA) Asif Inam, economist Ammar Habib Khan and CEO of Lucky Electric Power Rohail Muhammad were also part of the talk show.

The SAPM said that so far the government had saved Rs400 billion in the head of future capacity payments by terminating contracts with some IPPs; Rs200 billion after revised contracts with bagasse-based power plants and it would save Rs800 billion once take and pay mode agreements with 18 IPPs are signed. He claimed resolving the circular debt issue in the power sector very soon and then he would tackle the circular debt in the oil and gas sector.

Ali also asked for an inquiry against government institutions like Nepra, NTDC and PPIB for their flawed decisions in the last 10 years, which virtually brought economic activities to a standstill and increased the financial miseries of masses manifold apart from making the power sector financially and operationally unstainable.

He also stressed the capacity building of institutions enabling them to handle such wrongdoings amicably. He said what the task force was doing, should have been tackled by the institutions on time. The impression being created that the IPPs were being coerced into agreeing on take and pay mode was not true, saying talks were being held in a friendly atmosphere.

“Some argue that the talks with IPPs will damage future investment in the country but many power sector businessmen during the talks showed interest in buying the Uch power plant and an electricity distribution company (Disco), so the reality speaks otherwise. For the last four weeks, we have been in talks with 18 IPPs and in case, there is any kind of arm-twisting, the agreements should have been revised within no time. For four weeks, there have been fair and friendly talks. One IPP has served a notice to the government and another has sent a letter, but the taskforce member will amicably settle down the issue and persuade them to agree to take and pay mode,” he maintained.

He said that there were many unscrupulous IPPs which had made excessive profits in the range of 60-80 percent, but it was not so simple as it all happened at a deeper level. “They made unjustified profits in the head of fuel and O&M. And some IPPs borrowed for their plants and purchased a new IPP. Another invested a substantial amount in the stock exchange and earned from energy trade. An IPP also invested in the housing sector, which is illegal. In 2012, the SECP, which is the corporate sector regulator, asked for their accounts audit, but the IPPs refused and in 2017, the Nepra tried to conduct a heat audit, but they managed to get a stay order,” he said and questioned that if they were innocent, why they evaded the forensic and heat audit.

“This shows that in the past, they were involved in massive wrongdoings. In 2020, excessive profits were identified and it was recommended that Nepra would initiate arbitration to ensure their wrongdoings and then take the required action, but the IPPs said that arbitration would take place from the forums mentioned in the power purchase agreements. Four years have passed and why arbitration by the London Court of International Arbitration (LCIA) was not initiated and reasons behind it are quite obvious,” he maintained. He also mentioned that the terms under various policies offered to them were not followed by many unscrupulous IPPs.

Speaking about the excessive profit, Ali pointed out that the 2002 regime was a cost plus one, in which the government was responsible for the full cost of electricity, including salaries, insurance and spare parts. “Under that regime, they were getting a 15% internal rate of return (IRR) in dollars,” he said, noting that if the return is more than the agreed-upon one, it means “they were making more.”

Ali said that there had been a lack of planning on the part of the government while dealing with the power sector. “The past governments increased the capacity of the country to 43,000 MWs, but during peak months in summer, electricity demand grows to only 25,000 MWs and then it comes down in winter to 10,000 MWs. In the southern part of the country, cheaper power plants are installed. We have adopted a multi-pronged strategy which includes efforts to debt profiling of power plants with China with relief of Rs3-4 per unit and bringing down taxes in the tariff by Rs5 per unit apart from slashing down Rs3 per unit from the IPPs. Right now, power consumers are paying Rs800 billion in taxes to the government and the Power Division asked the finance minister to slash it down to Rs300 billion. The loss of Rs500 billion should be recovered from other venues. The IMF will not object as its concern is the revenue target which should be recovered from other options,” he elaborated.

He said that over Rs600 billion go down the drain because of theft in Discos. “This issue needs immediate attention from Nepra, NTDC and Discos. The government should get out of the power sector business and as far as the private power market is concerned, the wholesale power market will be established in 30-40 months but the retail power market would take 1.5-2 years to get in place. For BtB electricity trade, wheeling charges at Rs26 per unit would not work, ideally it should be Rs7-9 per unit but it would settle down at Rs12-13 per unit,” he added.

Gohar Ejaz, former caretaker minister and a businessman, said private IPPs were getting capacity payments of Rs29.70 per unit from consumers. At present, the industry is being charged Rs38.40 per unit, agriculture Rs60, domestic Rs60, and commercial Rs80 per unit and asked if a country of 240 million people could survive with such exorbitant tariffs. The country has installed capacity to generate electricity of 43,000 MWs but average consumption stands at 12,000 MWs. Nuclear power plants are running at 86 percent of their capacity, but there are many non-functional IPPs which are being paid Rs32 billion each. The nation was paying Rs1,200 billion annually to the government for several non-functional power plants. There were “criminal motives” behind the installation of power plants at double cost,” he claimed.

Former CPEC chairman and Hubco chief Khalid Mansoor refuted Ali’s remarks, noting that during his tenure as CPEC chairman, they had agreed to conduct heat rate audits of the power producers. “In this regard, it was decided to approach some experts and chalk out terms of reference. There was no resistance and we all agreed to it,” he said.

Mansoor added that the government’s responsibility at that time was to induct the experts and initiate the audit process but “nothing happened”. He said he had asked for special assistance previously and why the government does not come out of the single buyer regime method. “Open the sector, rationalise the wheeling charge and pave the way for a competitive market,” he added.

He noted that not all IPPs were against the SECP audit, saying that if there was a stay order, the government should have persuaded and vacated it. “Such generalise critique will affect investment in the sector,” he added.

He said the government needed to talk with the Chinese authorities to increase the debt payment tenure from 10 to 20 years as it would give solace of over Rs3 per unit. He also suggested slashing down the surcharges imposed in the tariff for debt servicing to handle the loans parked in PHL (power holding company). He asked for an increase in the fixed capacity charges in the tariff.

Asif Inam, a businessman and former APTMA chief, said that IPPs involved in making money in the form of fuel and O&M should be dealt with like criminals involved in the looting of wheat from godowns. They should face criminal cases, he added.

Lucky Electric Power CEO Rohail Muhammad said that IPPs had invested as per the power policies and if an IPP was involved in wrongdoing, they should be treated accordingly. “Under the 2015 power policy, CPEC projects were installed. However, there is no issue as the equity from China from investors came through the State Bank of Pakistan and the projects were set up under 15 percent IRR in dollar indexation. In 2015, the demand was 106 billion units per annum which should have been 200 billion units as was projected by the then government. However, electricity demand has decreased manifold which is why the capacity payments share in the tariff has increased.”

Ammar Habib Khan, a young economist, said that surplus electricity was a good problem and the country was lucky as it had huge physical electricity-related infrastructure. He said that surplus electricity should be provided to the industry at auctioned prices. In 2020-21, the industrial demand was 3,800 MWs which tumbled to 3,200 MWs. “The lower prices of surplus electricity will generate demand from the industry. However, the problem lies in macro-economic structure. The dollar appreciated from Rs150 to Rs280, which is why the capacity payment issues aggravated. In capacity payment of Rs18.39 per unit, the consumer pays Rs10 in the head of debt payments and the challenge is how to deal with the debt component,” he added.